Foreign exchange scarcity pushed Nigerian manufacturers into sourcing more raw materials loca
Foreign exchange scarcity pushed Nigerian manufacturers into sourcing more raw materials locally, raising domestic input sourcing by 17 percent in 10 years, according to BusinessDay analysis of documents obtained from the Manufacturers Association of Nigeria (MAN) since 2014.
In the first half (H1) of 2014, Nigerian manufacturers sourced only 47.6 percent of their raw materials locally. This was a period when Nigeria enjoyed high petrodollar inflows, with no one expecting that things would get worse in a matter of months.
In the second half (H2) of 2014, crude oil prices began falling, leading to lower petrodollars for the then Africa’s largest economy. However, this proved to be a game changer as it forced manufacturers to invest more in backward integration projects to beat the foreign exchange crunch.
Read also: Manufacturers struggle on FX crunch, energy, logistics costs
The result of those investments were seen in H1 2024 when local input sourcing stood at 56.03 percent.
“This increase indicates a gradual shift towards local sourcing, driven by difficulties in obtaining foreign exchange,” said MAN.
Battered Naira
Naira has seen its worst crisis in the last 10 years on the back of low petrodollars, an extremely high dollar demand and a relatively lower supply.
It exchanged at 160-176/$ in the last quarter of 2014 from 150-160/$ in early- to mid-2014. It has since had a pratfall, hitting a low of N1, 625.25 on November 15, 2024.
The nation’s manufacturers have been on the receiving end as they import some of their raw materials from hot-rolled steel to chemical gums. In a bid to resolve the forex crisis, the Central Bank of Nigeria (CBN) floated the forex market in 2023. However, that has not helped the battered naira, which has weakened by over 70 percent since June 2023. The situation has forced manufacturers to look inwardly to beat the forex crunch.
Investors ramp up backward integration projects
FrieslandCampina WAMCO works with more than 20,000 pastoralists in Oyo, Osun, Ogun, Ondo, and Kwara, including the northern states, to source raw milk – an essential input for its products.
The dairy maker said in 2023 that it was sourcing five million litres of milk from local pastoralists. Some of its products today contain 100 percent of local milk sourced directly from farms.
“We train and support these farmers to help them grow trees within their communities, which form part of our dairy development sites. We also help them with pasture development,” the company said in a recent interview.
Similarly, Flour Mills of Nigeria (FMN) paid N552.5 billion to local suppliers in 2021 and N649.9bn in 2022 to obtain local raw materials. It plans to invest $1 billion in the new four years on sugar plantations and cassava starch processing, said John Coumantaros, its chairman.
Read also: Rising unsold inventory weighs on Nigerian manufacturers
“Flour Mills of Nigeria Plc plans to invest a minimum of $500 million into its sugar operations in Niger State to increase production from the current 100,000 tons to over 400,000 tons annually,” he said in October.
“Additionally, the company will allocate $100 million to establish a cassava-processing plant to eliminate cassava starch imports. In the full year of 2023/2024, Flour Mills spent around N1.8 trillion on raw materials, resulting in its profit declining by 91 percent.”
Similarly, Nigerian Breweries said it invested N78 billion in sorghum and cassava cultivation over a period of five years. Sorghum and cassava are inputs for making beer.
Hans Essaadi, its managing director, said last year at the company’s 2023 pre-Annual General Meeting (AGM) media parley that the biggest brewer would continue to invest in the development, improvement and commercialisation of its agricultural raw materials.
Dangote Cement, BUA Cement and Lafarge Africa source their limestone, gypsum, clay and silica locally from various sites across Nigeria.
Also, Nestle said in June 2023 that it was working to develop local suppliers of onion powder in Nigeria and Senegal, and turmeric powder in Nigeria.
Despite news of the imminent exit of PZ Cussons, its joint venture with Wilmar, which began in 2010, has emerged as a profitable venture.
PZ Wilmar owns 26,500 hectares of palm oil plantations in Cross River State. About 5,549 hectares (ha) of oil palm plantation are located in Calaro Estate, while 2,369 ha are in an area known as Calaro Extension. With this, PZ and other manufacturers source their palm oil from Wilmar.
In the financial year ended May 31, 2024, PZ Wilmar contributed £10.7 million (FY2) to PZ Cussons’ adjusted operating profit of £30.3 million. This was an improvement from £7.5 million contributed by Wilmar the previous year.
“Compared to the prior year, this improvement reflects continued strong commercial execution.”
Read also: Reliable energy supply fuels manufacturers cost competitiveness, growth – MAN
Manufacturers’ challenges
Manufacturers are facing forex crisis, which has crippled most of them that are heavily dependent on foreign inputs.
While they are expanding their backward integration projects, the cost of those projects is suffocating many of them.
Manufacturers borrowed from deposit money banks at 28.1 percent in the second half of 2023, MAN said.
The CBN raised the base interest rate or monetary policy rate by 50 basis points to 27.5 percent in October 2024, which has seen interest rates in banks hover between 32 percent and 40 percent, according to financial analysts.
“The continued increase in interest rates, which now totals 15.75 percentage points since May 2022, would compound the challenges faced by the sector, including rising production costs in the face of declining consumer purchasing power,” said Segun Ajayi-Kadir, director-general of MAN.
“With the increase in borrowing costs, manufacturers will now pay over 35 percent on their credit facilities. Clearly, this will lead to increase in production costs, higher prices of finished goods, lower competitiveness and production capacity expansion,” he noted.
A combination of high energy and logistics costs, multiple taxes and port delays, including forex crisis, saw 767 manufacturers shut down operations, with 335 distressed in 2023.
Read also: Foreign exchange intervention can help countries navigate shocks – IMF
“There is a need to resolve issues of electricity tariff and provide single-digit funding for manufacturers,” Ike Ibeabuchi, an emerging markets analyst, said.
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